Saturday, January 21, 2017

... others argued that greater government spending would ramp up demand for goods and services, increasing productivity by allowing business to operate near full capacity.

I don't know why they do that, combine two thoughts into one. It only creates confusion. Take that little excerpt there from VOX, separate out the part about "greater government spending", and throw it away. I don't want to talk about greater government spending, because so many people react so negatively to it. I want to talk about a way to increase productivity:

... ramp up demand for goods and services, increasing productivity by allowing business to operate near full capacity.

Capacity utilization has been drifting downhill for decades:

Graph #1: The Long-Term Decline of Capacity Utilization

The red line shows the trend. There was one bright spot there in the 1990s: two peaks quite above trend. Two peaks in the 1990s, reaching the 85% level briefly achieved in the 1980s. And between the two peaks, utilization persisted at trend level rather than falling below, as so often happens on this graph.

So we have an example of a time of high utilization, which is also a time of high productivity:

Productivity was higher in the 1990s than in the 1970s or '80s. And utilization was up. (Productivity was also high in the 2000-2007 period. But that was recession effects.)

Was the higher productivity of the 1990s due to "greater government spending"? No: Those were the years the Federal budget was coming into balance. Moreover, the trend of capacity utilization and the trend of Federal debt growth run in opposite directions.

If Federal debt growth was generally accelerating (except in the 1990s) and capacity utilization was generally declining (except in the 1990s) are we led to conclude that Federal debt growth harms capacity utilization? No. That leap is based on too few facts. The broader picture contradicts that story.

It is not likely that GDP growth was good because the Federal budget approached balance in the 1990s. It is more likely that the Federal budget approached balance in the 1990s because GDP growth was good. So the question remains: What pushed productivity and GDP growth up to those memorable levels?

I suggest that a reduction in cost was responsible for the good years. A reduction in cost would keep prices on the low side and profit on the high side. Good for business, and good for consumers. Growth picks up, and capacity utilization picks up, and productivity picks up:

... ramp up demand for goods and services, increasing productivity by allowing business to operate near full capacity.

So a reduction in cost could be responsible for a rise in productivity, or could anyway have contributed to it. The question then is: What reduction in cost can benefit both producers and consumers? If business costs are down, it's probably because wages are down. On the other hand, if wages are gaining on the cost of living, it probably means wage costs are rising in the business sector. Where is the category of costs that can be reduced, that can bring about this magical improvement of growth and productivity?

Finance. Reducing the size and cost of finance allows wages and profits to rise.

... bank credit creation affords an opportunity for rentier interests to install financial “tollbooths” to charge access fees in the form of interest charges and currency-transfer agio fees...

The FIRE sector’s real estate, financial system, monopolies, and other rent-extracting “tollbooth” privileges are not valued in terms of their contribution to production or living standards, but by how much they can extract from the economy. By classical definition, these rentier payments are not technologically necessary for production, distribution, and consumption. They are not investments in the economy’s productive capacity, but extraction from the surplus it produces.

Finance. In the 1990s, a reduction in financial costs left more money available for wages and profits. As a result, the economy was almost as good in the 1990s as it was in the 1960s when financial costs were low because finance was still small.

Bezemer and Hudson refer to "tollbooths" and "FIRE". I just call it finance. But in all the years between $3.50 and $35.00 on the graph below, there was just one time that the "debt per dollar" ratio obviously fell, reducing financial cost per dollar. That one time was the early 1990s, immediately before the good years of productivity and utilization and RGDP growth:

Graph #1: Dollars of Total (Public and Private) Debt, per Dollar of Spending Money